An Overview of Fixed Annuities
When it comes to annuities, many different types exist such as fixed annuities. Although all types of annuities have common denominators, distinct differences also exist. In general, an annuity is a legal contract executed between one or more persons and an insurance company whereby in exchange for the annuity holder paying the company a lump sum of money, the insurance company pays the person or persons with regular income payments for life or a determined amount of time.
Annuities to include fixed annuities are used most commonly as an investment so the annuity holder enjoys a regular stream of income until death. Although some people will use fixed annuities as the sole retirement plan, most will use annuities to supplement other retirement plans. Regardless, because annuities offer so many benefits, they have become increasingly popular in recent years. One of the primary benefits of all annuities is that the investment gains begin to accumulate and compound as tax-deferred.
One consideration when putting money into fixed annuities is that money cannot be withdrawn until age 59.5 without being penalized. Now, if the annuity holder wants to take money out prior to this age, the Internal Revenue Service would automatically tack on a 10% penalty. In addition, fixed annuities have surrender charges added, which means that early withdrawals of funds would be penalized over the level listed in the contract. Then, any investment gain associated with annuities being distributed would be taxed as standard income.
Many people get fixed annuities mixed up with insurance policies and while some similarities exist, they each serve a slightly different purpose. Two primary differences is that using annuities as an investment instead of insurance policies provides features of insurance to include minimum guarantees and even death benefits. However, fixed annuities are designed to provide the account holder with lifetime income.
As mentioned, each type of annuity is unique and with fixed annuities, this type of investment is setup to pay a fixed rate of interest that is guaranteed. The payment would be for an initial part of the accumulation period but in addition to this, fixed annuities have a rate that may or may not change depending on market performance. With this particular type of annuity, a minimum guaranteed rate is attached and if wanted, a death benefit could be added to the annuity contract.
In most cases, fixed annuities are purchased by people who are getting close to retirement age or those who have already retired. Although some risks should be considered, overall, annuities of this type are rated as high-graded fixed income opportunities with numerous positive dynamics.
